Songs From The Weeknd, Maroon 5 helps support KKR’s first music-royalty tie-up

(Bloomberg) – A subsidiary of KKR is marketing its first-ever securitization of music royalties to bond investors this week, giving fund managers the chance to buy a track from a diverse catalog of 65,000 songs, including hits by The Weeknd, Stevie Nicks, and Childish Gambino.

KKR Credit Advisors sells over $732 million in asset-backed titles backed by publishing and sound recording royalties, as well as recovering artist advances, for a portfolio of songs valued at over 1, $1 billion, according to a pre-sale report from Kroll Bond Rating Agency. The offer is being led by Credit Suisse and KKR, and Kroll expects to give the deal an A rating, the sixth-highest rating.

This is just the latest link to be backed by music rights and royalties. David Bowie pioneered similar arrangements in the late 1990s when he secured his catalog’s royalty streams, in a model that was later replicated by musicians such as James Brown and The Isley Brothers.

Read more: The Who, Tim McGraw Music Rights Back New $304M Bond

Other such deals could come after a wide range of artists, from John Legend, Bruce Springsteen and Bob Dylan to Shakira, have sold all or part of the rights to their catalogs. Companies or investment vehicles often buy the assets, and these bonds are a way to help fund their purchases.

The latest music ABS sale comes amid a very active period for bankers bundling unusual assets into bonds. They have sold off securities backed by everything from fast food franchises to fitness center fees at the fastest pace since the global financial crisis as investors seek yield and inflation protection.

The catalog underlying the transaction was owned by Kobalt Capital Limited and administered by Kobalt Music Publishing, an independent music rights company. Initially, Kobalt will be the primary administrator for a large majority of the catalog.

The proliferation of streaming will only help bond performance, Kroll analysts said. “Higher cash flow growth than originally expected in the valuation assumptions could lead to increased cash flow in the transaction,” they noted.

However, under federal law, there is a small risk that some artists in the catalog could regain copyright ownership of their songs sooner than expected, especially for older songs, Kroll said. This could theoretically impact the cash flow of these songs, but Kroll took this risk into consideration when rating the tracks, the company wrote.

There are seven pending infringement claims against songs in the portfolio that could impact cash flow going forward, Kroll said. Two of those claims are against Taylor Swift for her 2014 hit “Shake It Off,” which was accused by two separate songwriters of removing lyrics from other songs, Kroll said.

More than 11% of songs in the portfolio have made Billboard Top 10 charts, the ratings agency said.

Relative Value: Agency MBS

  • Goldman Sachs Asset Management has moved its underexposure to agency MBS closer to benchmark levels, adding exposure to bonds at attractive levels amid recent weakness, the strategists said in the weekly Fixed Income Note. of the society.
  • That said, analysts remain underweight given the impending Fed quantitative tightening
  • “For context, Fed agency MBS holdings are up 97% since March 2020, and the central bank holds 33% of the agency MBS universe in circulation. We believe that a loosening of the Fed’s presence in the market will be a headwind to performance going forward”

Quotable

“CMBS players are considering the effects of rising rates on commercial real estate properties,” said Lea Overby, head of CMBS research at Barclays, in an interview. “There will be a higher cost of servicing the debt. A ripple effect will be lower transaction values. There may be higher debt service, which could otherwise have been used for tenant improvement. Much of CRE needs capital for properties, so in many ways now is not the right time for rates to rise.

And after

ABS deals in the queue for next week include World Omni (auto premium), Marlette Funding (consumer loans), Mercury Financial (credit card ABS) and GBX Leasing (railcar ABS)

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